Outlook: Telco challenge

THE FAST-moving world of the Internet and the packet switching technology upon which it is based is both an opportunity and a threat to British Telecom and others national telecommunications incumbents, but long term it is probably more of the latter than the former. The opportunity is clear from BT's results in recent quarters. Soaring on-line usage is boosting revenue and profits in a manner wholly unexpected. At this stage, the threat may seem mostly theoretical, but be assured it is very real.

BT and other incumbent carriers have spent billions of pounds over decades to build the conventional circuit switched networks that deliver the present very high quality voice reception. These circuit switched networks, however, are highly inefficient compared to their packet switched counterparts.

In the time that one telephone call is made by connecting two circuits, the same connection is capable of transmitting literally millions of the data packets generated by computers. Though packet switched voice telephony is in its infancy, in a few years (and with investment of a few billions more) the quality issue will be largely resolved and long distance voice calling will, like Internet access, become virtually free.

As a result BT and other national incumbents will need to make a transition from charging for the time voice circuits are engaged to charging for the volumes of data packets delivered. Here BT faces extremely stiff competition from low cost, high capacity telecoms start-ups like NTL, as well as global exchange and Internet giants like WorldCom. To compete, BT must migrate customers to flat rate, subscription charges, with incremental fees for the volumes of data delivered.

Yesterday's announcement from BT of direct dial access to the Internet for a flat rate wholesale price of pounds 140 per month is a formal recognition that the the old world for telcos is passing away.

BT envisages that internet service providers will be able to offer unlimited Internet access for as little as pounds 10 per month, although it admits that use of over eight hours per day could result in about a penny per minute additional charge. With high speed Internet access via ADSL to begin in March, BT is gearing up for a radical change in the way it does business. The question is whether BT, still steeped in bureaucracy, can invent and then execute a new business model to take advantage of these awesome technological changes. We'll see.

Outlook@independent.co.uk